Never in my 15 years of watching interest rates have I seen a lender spur mortgage competition like HSBC’s Canadian unit. But with Royal Bank of Canada’s planned acquisition of HSBC Bank Canada, the mortgage business could regress, costing consumers far too much.
Why HSBC matters
Consider one example. As I’m writing this, HSBC Canada’s uninsured five-year fixed rate is 5.29 per cent, the best of any national lender.
That’s a whopping 40 basis points below RBC, its proposed acquirer, which advertises a “special offer” of 5.69 per cent. RBC’s uninsured five-year rate is the fourth-highest of the 27 national lenders I track. (There are 100 basis points, or bps, in a percentage point.)
Were you buying Canada’s average $644,643 home with 20-per-cent down (that is, a $515,715 mortgage), and had you paid RBC’s advertised discounted rate, that 40 bps would cost you almost $10,000 more interest over five years.
Now, most smart people refuse to pay big bank’s “special offer” rates. Qualified borrowers negotiate and maybe save another 20 bps off the rates you see on RBC’s website, give or take. But saving 20 bps is a far cry from saving 40 bps.
How HSBC changed the game
It all started in 2016. That’s when HSBC Canada rolled out its “no haggle” mortgage rate policy and began materially undercutting major banks. As time went on and people like me talked about HSBC’s rate superiority, consumers took notice. As a result, big banks had to take notice.
While the oligopoly has generally refused to match HSBC, at least openly, Canada’s biggest banks constantly come across mortgage shoppers who quote HSBC’s rates and ask for a rate match.
HSBC’s bank competitors then often discount their inflated advertised rates. That is, assuming those customers are still inclined to stay with their bank. Many other rate-sensitive mortgage shoppers have simply ditched their bank and switched to HSBC.
If you consider the number of people moving to HSBC, the number using HSBC rates as negotiating leverage and the number of competitors that must be more aggressive owing to HSBC’s rates, we’re talking potentially hundreds of millions of dollars of interest savings for Canadian borrowers, simply because of the impact of HSBC’s undercutting.
I suspect RBC’s number crunchers know full well the impact of eliminating this threat to their profit margins.
Competition at risk
On a Tuesday conference call, David McKay, RBC’s chief executive, used HSBC Canada’s size as justification for the Competition Bureau not blocking the takeover. HSBC Canada is “still a relatively small bank by market share of 2 per cent or less,” he said, adding he didn’t see any reason to believe right now there should be “concerns.”
But if you’re a Canadian who needs to save more on your mortgage, you should be very concerned.
The last time the Competition Bureau had a chance to preserve competition, it failed. In 2012, it approved Bank of Nova Scotia’s acquisition of ING Bank of Canada. At the time, ING Bank offered significantly better mortgage products than the big banks – “better” meaning lower advertised rates, more generous prepayment privileges, better early-refinance flexibility and much fairer fixed-mortgage prepayment penalties.
ING rebranded as Tangerine, which still exists today. Unfortunately for consumers, Tangerine’s relative mortgage discounts have been mostly subpar versus the ING days. It also pulled out of the mortgage broker business after the merger, although it recently allowed a small number of brokers back in. HSBC has its own broker channel through Dominion Lending Centres, a competition driver that could also be in jeopardy.
In 1998, the Bureau opposed the proposed mergers between Royal Bank of Canada and Bank of Montreal, and between Canadian Imperial Bank of Commerce and Toronto-Dominion Bank. The government at the time called it “an unacceptable concentration of economic power.”
But those were Big Five banks buying Big Five banks. This time, it’s the No. 1 bank buying the No. 7 bank. My fear is that this could lead the Competition Bureau to discount this transaction’s significance on consumers, whom it’s tasked to protect.
Don’t let its size fool you
Owing partly to our bank oligopoly’s sheer dominance and partly to big banks’ perceived value proposition, HSBC Bank Canada has amassed just a 2-per-cent slice of this country’s mortgage pie. But that 2-per-cent share betrays its profound benefit to competition.
No other Canadian competitor has had the scale, rock-bottom funding costs and cross-selling opportunities to consistently justify leading rates. And note, “consistently” is the keyword, as any lender can have a small bucket of money to lend out at deep discounts for a short period of time.
HSBC’s leading rates keep big banks honest by forcing them to discount more aggressively, even if only behind the scenes.
If this deal is approved, and unless the Competition Bureau forces RBC to spin it off, it seems likely that HSBC Canada’s mortgage business will disappear.
“After closing, we expect to bring HSBC Canada clients and employees under the umbrella of RBC’s brand,” RBC spokesperson Jeff Lanthier said in an e-mail. “The marketplace is highly competitive and will remain that way after the acquisition, which will not give RBC any ability to raise rates or reduce choice.”
But “competitive” is a highly subjective word, especially when used by lenders. There’s not a lender in Canada that doesn’t claim to have “competitive” rates.
As a long-time rate analyst, I know competitive rates when I see them. And if HSBC’s mortgage model is lost, consumer savings are lost. It’s that simple.
Falling yields pull down fixed rates
The rate move of the week was with the one-year uninsured fixed, which fell 50 bps.
One-year terms are hot commodities among mortgagors hoping to refinance lower next year, when many expect rates to drop.
With bond yields declining amid rising inflation optimism, other fixed rates fell as well, mostly by five to ten basis points. But the near-term trend is definitely lower.
Rates are as of Thursday from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.